On Thursday, the OPEC+ group of oil-producing countries will meet, and it is expected that they will agree to increase production in August to meet demand and temper recent price rises.
While the group’s most recent increases in production were driven by increased demand, price levels will now be a guiding force in the club’s decisions.
Following a drop in demand caused by the coronavirus pandemic last year, which caused crude prices to briefly fall into negative territory, the club led by Saudi Arabia and Russia imposed drastic production cuts to raise prices.
Prices for the two reference contracts, Brent and WTI, have recovered to levels not seen since October 2018, rewarding the 13 members of OPEC and their ten allies in the OPEC+ grouping. However, that strategy has worked almost too well and the group is currently following a policy of cautiously turning the taps back on.
While rising prices appear to be a boon for producers — and some will be pushing to increase output to cash in — there are also risks.
Russia, as it has done at several recent OPEC+ meetings, is expected to advocate for increased output. According to Saxobank’s Ole Hansen, Moscow “may be more inclined to support a production increase to ensure a higher market share while limiting the risk of rising non-OPEC production.”
Moscow “may be more inclined to support a production increase to ensure a higher market share while limiting the risk of rising non-OPEC production,” according to Ole Hansen from Saxobank.
“Pressure will likely not only come from within the group but there will also be growing calls from key consumers to cool the market down, as countries come out of the other side of Covid-19 lockdowns,” says Warren Patterson of ING bank.
India is a good example of this. The world’s third-largest crude consumer has been hit by a coronavirus outbreak in recent months, prompting OPEC+ to “phase out crude output cuts to temper rising inflationary pressures,” according to PVM’s Stephen Brennock.
“If prices remain this high, this will eat into consumers’ disposable incomes and potentially choke economic growth, which, over time, will weigh on crude prices,” explained Fawad Razaqzada of ThinkMarkets.
The OPEC+ states have left themselves room for manoeuvre as they are currently still planning to leave 5.8 million barrels per day (BPD) of crude in the ground over the month of July that they could easily extract and sell.
The majority of investors are anticipating a modest increase of 500,000 BPD in August. But OPEC+ always has the capacity to surprise.‘A summer of intense travel’ In recent months, the outlook for crude demand has been steadily improving.
The International Energy Agency (IEA) predicted that global demand would outstrip pre-pandemic levels by the end of 2022 in its most recent report, released in mid-June.
According to Jeffrey Halley of Oanda, demand will be boosted as “Americans embrace a travel intensive summer” on cars, planes, and cruises, as well as because “global vaccination rollout is improving.”
As has been the case in recent months, the cartel will have to keep an eye on diplomatic developments involving one of its members in particular — Iran.
If current talks on resuming US participation in the 2015 Iran nuclear deal are successful, the country may be able to resume oil exports at levels before 2018, when former US President Donald Trump abruptly withdrew from the agreement and imposed sanctions.